Inventory Turnover is a financial metric used to show how many times the inventory of a company is turned into goods, sold, and repurchased over a given period. It essentially measures how effective a company is atconverting its inventory into sales, and displays the effectiveness of the business' inventory control and management efforts.
The Inventory Turnover Ratio provides useful information to shareholders that determine the efficiency of the company. A low value of inventory turnover may represent poor sales or possibly excess inventory, which can create cash flow issues if it gets too bad.
A few examples of these increased expenses are:
- The cost of obsolescence
- 仓储和存储成本
- Utility costs
- Insurance costs
- 机会成本
On the other end of the spectrum, a high value of inventory turnover represents a strong sales technique where inventory is being sold quickly. This demonstrates that there is sufficient demand for their product and gives shareholders comfort knowing that the company is efficient at managing their inventory levels and minimizing the risk with the inventory they hold.
Formula for Inventory Turnover
There are 2 formulas you can use to calculate inventory turnover:
However, the first formula is usually more widely used by financial analysts as it reflects what items in inventory actually cost a copmany.
The inventory turnover ratio can be analyzed to compare the efficiency of different businesses that are within the same industry and of similar size in managing and selling their inventory.
Interestingly, the industry sectors with the highest average inventory turnover ratio, according to CSI markets as of Q3 2021, are:
资料来源：CSI市场
The financial and services industry sectors have the highest inventory turnover ratio, due to the intangible nature of their operations. In other words, they just don't hold a lot of physical inventory. The ratios of 53.25 and 31.82 mean that the Financial and Services industry sectors can replenish their ordinary inventory an average of 53 and 31 times a year, respectively.
Days Sales of Inventory is a ratio related to inventory turnover and is used by financial analysts to determine the days it takes for a business to convert its inventory to sales. What exactly is Days Sales of Inventory though?
What is Days Sales of Inventory (DSI)?
DSI is a financial ratio that is similar to the inventory turnover ratio, although it measures the averagenumberof days it takes for a business to convert its inventory to sales. A lower DSI is preferred, as it represents efficiency where the company takes a shorter time to sell off their inventory, with a higher DSI representing a longer duration.
The two formulas for the Days Sales of Inventory ratio are:
Using the previous table used for the average inventory turnover ratio by industry sector, we can use one of these formulas to determine the average Days Sales of Inventory ratio by industry sector, which is:
This showcases that the Financial sector is the fastest in turning its inventory into sales, taking them an average of 6 days to turn its inventory into revenue, however, this is pretty meaningless since shipping goods and holding inventory isn't their main business as they are primarily selling services and advice.
These definitions might be confusing, so here are a few examples to help consolidate the information:
Example of Inventory Turnover
Pyth Inc is a retail company that sells a wide range of products, including appliances, home renovation products, manchester, and furniture. In its 2020 annual report, it disclosed sales revenue of $23,500,000, a gross profit margin of 40%, and an average inventory of $2,400,000.
计算这个,我们必须冷杉t recall the formula to obtainCOGS，即收入 - 毛利（GP）= COGS。可以通过将收入量乘以GP利润来找到GP：
- GP = 23,500,000 x 40% = $9,400,000
现在，我们可以通过从收入中减去GP来计算齿轮：
- COGS = 23,500,000 - 9,400,000 = $14,100,000
We can now find Inventory Turnover by using the first formula listed previously:
- Inventory Turnover = 14,100,000 / 2,400,000≈5.9
根据CSI市场的数据，该值表明该公司不有效地将其库存转换为销售，因为零售业的行业平均库存周转率约为12。这可能表明购买水平较低，购买库存盈余以及销售业绩差，这意味着企业潜在的潜在问题。
An example of Days Sales of Inventory
Continuing the example above, we apply the formula for DSI to find the number of days Pyth Inc requires to convert their inventory to sales.
- 因此，DSI =（2,400,000 / 9,400,000）x 365天≈ 93 days
It takes Pyth Inc approximately 93 days to convert its inventory into sales, which according to the average days sales of inventory by industry sector table, is below average. This means they are not able to quickly turn their inventory into sales. This might be because of various reasons, some of which could be:
- Excess inventory
- Poor sales performance
- Obsolete inventory they have yet to write down
Pyth Inc must address these potential issues, otherwise risk costs such as opportunity costs, storage costs, and all other costs that were outlined previously.
The following videos provide great explanations for the Inventory Turnover ratio and the Days Sales of Inventory ratio:
Related Terms
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